The 2019 playbook for the stock market is looking a bit like the playbook from 1999. This time, though, the Federal Reserve might not cooperate.

Stocks have found their footing lately and a lot of that has to do with the central bank. In response to worries that the economy will face more formidable headwinds this year than last, the Fed seems to have dialed back its plans to raise rates, and Chairman
Jerome Powell
has said that mild inflation allows the central bank to take a flexible approach toward setting policy. Since hitting a 20-month low in late December, the S&P 500 is up about 10%.

How powerful the economic headwinds are is anyone’s guess. While the combination of slowing growth overseas, fading tax-cut and spending stimulus and the cumulative effects of the Fed’s rate increases suggest the economy should slow, that hasn’t shown up in the hard data. Some survey-based measures have softened, such as the Institute for Supply Management’s manufacturing report and Duke University’s quarterly poll of chief financial officers, but that may have more to do with the tumult in stocks and weakness abroad than the U.S. economy.

If not a repeat, the situation at least rhymes with what was happening around the start of 1999. Back then, markets still were recovering from the Russian debt crisis—an event that had precipitated the collapse of hedge fund Long Term Capital Management, pushed survey-based measures lower and led the Fed to cut rates three times in the fall of 1998.

Not long into 1999, it was clear that the economy wasn’t in such dire straits as feared, yet the Fed didn’t start taking back its rate increases until late June, helping fuel a massive rally in stocks. A big reason for the delayed response: Inflation was cooling, and Fed Chairman
Alan Greenspan
argued that technological advances were boosting productivity, allowing economic growth to accelerate without price pressures.

But the drop in inflation wasn’t really about productivity, notes
Robert Barbera,
co-director for the Center for Financial Economics at Johns Hopkins University. Rather the slowdown overseas had sent the dollar up, import prices down and oil prices to multidecade lows.

Jerome Powell: China, Tariffs and the U.S. Economy

Fed Chairman Jerome Powell said he doesn't yet see tariffs as having a visible mark on either the U.S. or China, but higher, long-lasting tariffs could in the long-run lead to a less-productive economy around the world. Photo: Getty

Unemployment kept falling and stocks reached skyward, but it wasn’t until inflation reasserted itself that the Fed started tightening the screws. In early 2000, the dot-com bubble burst and that was that.

Mr. Powell seems unlikely to confuse overseas weakness and a booming economy with a productivity miracle. Nor, if stocks start to stage a 1999-style rally, would he likely be as sanguine on the market risks as Mr. Greenspan. Indeed, 2013 Fed-meeting transcripts released last week show that Mr. Powell worries about what can happen when investors take on too much risk. “It’s worth remembering the power of another financial shock to damage the economy,” he said, according to the transcripts.

And for investors, it is worth remembering that somebody other than Alan Greenspan is in charge of the Fed.